A Europe to suit both Britain and Germany

Last week, even as British MPs were voting down the Government's position on the EU budget, I was attending a European discussion of a very different kind. In a conference room in Berlin - at an event marking the launch of Open Europe's new German partner organisation - hundreds of academics, journalists and policymakers sat listening to a brilliant speech by Otmar Issing, the former chief economist of the European Central Bank, about the intricacies of the eurozone bailouts and where the single currency must go next - all blissfully unaware of the fraught debate in the House of Commons.

When you spend time in both Britain and Germany, it is impossible not to notice how distant their stances on Europe have become. When Angela Merkel meets David Cameron at Downing Street today, to discuss the EU budget, they ought to have plenty of common ground. Berlin actually stands to lose more than London: under the current plans, its contribution would rise by about €30 billion over the seven years, whereas the UK's would go up by €17 billion. Nor does Merkel need to be told that the budget is a nonsense: even her Europhile foreign minister, Guido Westerwelle, says that the current set-up "leads to aberrations such as EU subsidies going to day-spas or romantic hotels".

So why are the talks expected to be frosty? The problem for the UK is, first, that the EU budget just isn't that important to Germany at the moment. For the past two years, Berlin has been preoccupied by the eurozone bailouts, and endless bickering over the lending capacity of the relevant funds (among other fascinating topics).

Second, Germany still perceives its contribution as a necessary sign of its commitment to the greater good. Indeed, the bailouts - despite their unpopularity - have actually made Berlin more reluctant to kick up a fuss over the EU budget: a few billion more, in return for a bit of goodwill in the austerity-fatigued Mediterranean, is seen as a sound investment given the trillions at stake over the euro. Such subsidies are also a convenient way to hide part of the Länderfinanzausgleich - the unpopular transfer payments to the East.

Allowing Cameron to take the flak over the budget therefore suits Merkel down to the ground. But what is really driving a wedge between them is the eurozone crisis. A host of recent stories have suggested that Merkel is "losing patience" with Britain's reluctance to accept more integration, and the hints that the UK is prepared to leave the EU altogether (her best line likened Britain to the old men heckling from the sidelines in The Muppet Show).

Part of the problem is that Germany and Britain keep on talking past each other. This is not just down to diverging views of the role of the market, or the merits of European project. It's also down to bad diplomacy. Cameron and George Osborne have made a habit of lecturing the Germans on the "inexorable logic" of the eurozone becoming a debt union - for which German taxpayers would foot the bill. This is a spectacular own goal, since it obscures a key area of agreement: namely, that Europe's economic malaise should be dealt with by structural, free-market reforms rather than doling out cheap cash.

Recent reports suggest that Merkel's frustrations have reached the point where she's prepared to wave goodbye to Britain altogether. In the past, so the analysis goes, Berlin needed London to balance the Mediterranean bloc. Now, Germany's chequebook does all the talking. Certain people in Merkel's office have taken to slipping this into chats with journalists, in case those in Westminster have missed it.

Beyond this posturing, however, Berlin knows that an EU without the UK would be a much less pleasant place. The single market would shrink by 15 per cent, with €75 billion in annual German exports facing extra costs. Germany's contribution to the EU budget would increase by an additional €10 or €15 billion. Nor would Britain's global clout be easy to replace.

Related Quotes

Company Profile

If it really came to a situation where the UK was on the verge of leaving the EU, Germany would almost certainly crunch the numbers and conclude that, as Ludwig Erhard said, "without Britain, Europe would only be a torso". But taking the long view, I am optimistic that a new Anglo-German deal is still there to be struck - one that would not just keep Britain in Europe, but create a Europe that Britain could live with.

How could this happen? First, both Cameron and Merkel need fundamental change of the EU in order to keep their domestic audiences on side. Almost two thirds of Germans, for example, oppose the idea of giving more cash to Europe.

Second, many in Germany now accept that a flexible Europe, allowing for different modes of membership, is inevitable. Such diversity could be a very good thing. It is also exactly what Britain wants.

Third, Germany is desperate to ensure that integration does not destroy the single market, which remains an asset. This should include making sure that any eurozone banking union doesn't push the City of London "offshore", which would cut off a facilitator of investment and a gateway to global markets also for Germany.

Both London and Berlin support the prudent use of public money, and oppose the papering over of economic cracks through fast and loose money. Both want to boost cross-border trade, in Europe and across the world. If the British government stops its misguided lecturing, and advocates that kind of change, it may find it has more friends than it realised.